I suggested a few weeks ago that Price Isn’t Everything when Buying a Home; that home buyers should beware of fixating on the elusive “bottom of the market” and remember this rule of thumb:
When interest rates go up one percent your purchasing power goes down ten percent.
I even posted a handy little rate chart demonstrating how interest rates have a heck of a lot to do with how much home you can afford.
Well, interest rates have been on the rise again the last few weeks. According to Freddie Mac’s Weekly Primary Mortgage Market Survey, the average interest rate for a 30-year fixed rate mortgage was up to 6.42% last week.
6.42% is a nice rate. Historically speaking, anything that starts with a “6″ is pretty darn good. It might surprise you though to know that rates have gone up almost a full point since January, according to Freddie Mac.
Here’s an example of how that rate increase might play out in Bullhead City real estate terms:
- Median Single Family Home Price in January 2008: $199,567.50
- Loan Amount with 10% down: $179,610.75
- Principle and Interest Payment at January rate of 5.48%: $1,017.56
- Principle and Interest Payment at June rate of 6.42%: $1,125.83
Two ways to look at this:
- The same house at the same price now costs $108.27 more per month. Same place, same price, higher interest rate, higher payment.
- The January monthly payment at the June interest rate now gets you a $180,375.55 house instead of a $199,567.50 house. In other words, the interest rate went up almost one percent and purchasing power went down almost ten percent.
Even if the would-be buyer that played the market in January could qualify for the higher payment in June, he still lost because of the higher cost of borrowing money.
Although interest rates have been on the move, they are still looking really good today at less than 6.5%. Still, if rates go up buying power goes down regardless of the home price. That’s what every buyer needs to know about interest rates.
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